Sunday, August 26, 2012

Damage from possible QE3 has already started

Those (including some of the dovish members of the FOMC) who still think that the policy of a new round of asset purchases is a low risk proposition should only take a look at US gasoline futures. They hit a multi-year high within the past couple of hours (Sunday night).

Nearby gasoline futures (Bloomberg)

Some are blaming this on the Tropical Storm Isaac, others on the Amuay plant explosion in Venezuela. The reality however is that these price increases are for the most part in anticipation of QE3:

By Asjylyn Loder
Aug. 27 (Bloomberg) -- Hedge funds raised bullish bets on
oil to a three-month high on signs that Federal Reserve Chairman
Ben S. Bernanke will take measures to bolster U.S. economic
growth and spur a rally in commodities.

Money managers increased net-long positions, or wagers on
rising prices, by 18 percent in the seven days ended Aug. 21,
according to the Commodity Futures Trading Commission’s
Commitments of Traders report on Aug. 24. They were at the
highest level since the week ended May 1.

Let's not pretend that central bank asset purchases and commodity prices are unrelated as some have suggested. QE3 carries with it risks of a spike in headline inflation that will end up damaging an already fragile consumer sentiment and completely negating any positive effects from additional liquidity. In fact the damage to the economy from elevated fuel prices has already started.